As founder and CEO of a small private real estate fund, I've experienced firsthand how a small firm is able to deliver high-yield returns as compared to larger Wall Street funds. Institutional Firms are more focused on building a large AUM (assets under management) company because of their allegiance to shareholders, while small firms are highly committed to manage their fund on behalf of their direct investors. 




Here are some of the topics we’ve identified where the managers of small private real estate funds can generate higher-yield returns:




1. Local Markets




As we all know, all real estate is local. An Institutional Real Estate Fund may not have the “boots on the ground” to see those market opportunities, and not only speaking about acquisitions, but also in marketing and managing a property while looking for a better return on investment.




Small Private Funds focus on small deal sizes, thus more likely to find, move fast and capitalize local opportunities. These deals are not as obvious or desirable to a large Institutional Firm. Valuations can be more subjective because they are based on local comps, market conditions and performed by local Real Estate Investors with different criteria and levels of expertise.




2. Additional Layers of Fees




A large Institutional Fund with billions of dollars to invest needs to work with other managers to deploy those funds. To do so, large firms often partner with small regional funds to invest those large sums of money, and to maintain a steady deal flow for their firms. This “partnership” brings double/triple layers of fees, and this is one of the biggest reasons of their underperformance.




Investing with a small fund manager means fewer middlemen, and fewer people requiring additional piece of the pie, so investors in small firms can earn higher returns — and they often do.




3. Alignment of Interests




The interests of small fund managers continue to be more closely aligned with their investors, especially when the fund managers are invested in their own funds alongside with their investment partners. Small Private Fund Managers generally have either a larger share of their net worth on the Fund or they offer down-side protection to their Investors while maintaining a personal relationship with their investment partners. Both factors lead to a manager with far greater skin in the game than a multibillion-dollar Investment Firm who may employ people who have never met an investor.




Additional Comment:




There are many great fund managers in the private lending real estate industry, but the industry is not set up to find them, instead the RIAs and BDs recommend “best-in-class” Institutional Funds to the Investors. While this may be true, they are “best-in-class” when compare them to other Institutional Fund Managers.




Because small Private Funds don’t have a big marquee names, they need to find their own Investors, however Investors have a better chance of reaching high-yield returns by investing on small private funds.




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